Abstract

We show the cost of trading on negative news relative to positive news increases prior to earnings announcements. Our evidence suggests this asymmetry is due to financial intermediaries reducing their exposure to announcement risks by providing liquidity asymmetrically. The asymmetry creates a predictable upward bias in prices that increases pre-announcement and subsequently reverses, confounding short-window announcement returns as measures of earnings news and risk premia. Our findings provide a link between trading behavior, return patterns, and the information content of prices around earnings announcements, and help to explain puzzling evidence in prior research that announcement risk premia precede the actual announcements.

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